What to look for in Home Depot earnings

Home Depot Inc. is scheduled to report fiscal second-quarter results on Tuesday, before the stock market opens.

The home-improvement retailing giant has a tough act to follow, as the company beat expectations for earnings, sales and same-store sales, and even cash flow, for the first quarter, and raised its full-year earnings outlook. That has helped the stock
HD, +0.08%
climb steadily since then to hit a record intraday high in midday trade on Monday.

Whether the company affirms or changes its full-year sales and earnings outlooks will be of keen interest to investors, because although the economy continued to grow in the second quarter at a pace that was below the company’s full-year forecasts, housing data remained strong, just like in the first quarter.

Here is what investors need to know:

Earnings: Home Depot is expected to report adjusted earnings, which excludes nonrecurring items, of $1.71 a share, up from $1.52 in the same period a year ago, according to a survey of analysts conducted by FactSet.

Estimize, which surveys sell-side analysts like FactSet, as well as hedge-fund executives, brokerages and buy-side analysts, said its EPS consensus is a little higher at $1.72.

The company has beat earnings expectations the past two quarters, and in 10 of the past 12 quarters.

For 2015, Home Depot said in May that it expects fiscal full-year EPS of $5.24 to $5.27, up from a previous forecast of $5.11 to $5.17.

Revenue: Revenue is expected to rise to $24.69 billion, up 3.7% from $23.81 billion a year ago, according to FactSet. The Estimize estimate is for revenue of $24.74 billion.

Same-store sales are expected to grow 3.5% from last year, including 4.1% growth in U.S. sales, according to FactSet.

The company’s latest outlook is for full-year net sales growth in the range of 4.2% to 4.8%, and for same-store sales to rise 4% to 4.6%.

Home Depot has beat net sales and same-store sales expectations the past four quarters.

Stock reaction: Home Depot’s stock, a component of the Dow Jones Industrial Average, has run up 14% year to date through midday trade on Monday, while the Dow has lost 1.6%.

On Monday, the stock rose as much as 0.8% to an all-time intraday high of $120.75 in morning trade, before pulling back to end the day down less than 0.1% below Friday’s record close of $119.75.

FactSet

Home Depot’s stock outperformed the Dow industrials by wide margin.

The average rating on the stock, of the nearly 30 analysts that submitted ratings to FactSet, is the equivalent of overweight. The average price target is $124.23, or about 3.8% above Monday’s closing price of $119.70.

Other issues: In Home Depot’s conference call with analysts following first-quarter results, Chief Financial Officer Carol Tome said the company’s 2015 sales outlook was based on U.S. gross domestic product (GDP) growth forecast of 3%. While she noted that GDP during the quarter was “weaker than expected,” housing data were ahead of assumptions.

On a bright note, Raymond James analyst Budd Bugatch wrote in a recent note to clients regarding the outlook for Home Depot: “Comments from suppliers suggests spending on large ticket discretionary items is increasing.”

Elsewhere, analyst David Schick at Stifel Nicolaus said he believes capital allocation will be a key focus for investors. He wrote in a note Friday about how the company has acquired Interline and Crown Bolt in the last six months, and raised its annual stock repurchase program during last year’s second-quarter results.

It’s clear CEO Craig Menear is comfortable making acquisitions to build capabilities and momentum in the pro business,” Schick wrote. “It would make sense for some incremental buyback as there’s flexibility to take on debt....”

Some other key financial metrics expected by analysts, according to FactSet, include:

• Free cash flow is expected to rise to $2.67 billion.

• Earnings before interest, taxes, depreciation and amortization (EBITDA) is expected to come in at $4.16 billion

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